IBM shares rise following earnings report

SAN FRANCISCO (MarketWatch) -- International Business Machines Corp. shares rose 2.5% Wednesday after the tech bellwether and Dow Industrials component reported a second-quarter profit that rose more than 10% from a year ago due to factors such as lower administrative costs.

Revenue from the technology giant's key global services and hardware divisions fell, leading some analysts to say challenges still face the technology giant a year after announcing a restructuring plan that included about 14,000 job cuts.

IBM
IBM, +0.31%
shares rose $1.87, to close at $76.13 following late-Monday's earnings report. Big Blue said posted net income of $2.02 billion, or $1.30 a share, for the quarter ended June 30, up from $1.83 billion, or $1.12 a share, in the same period a year earlier.

Revenue slipped to $21.9 billion, down almost 2% from $22.3 billion. Excluding year-ago sales from the personal-computer business IBM sold to Lenovo Group, revenue would have risen by 1%.

The results were basically in line with the average estimate of analysts surveyed by Thomson First Call, who forecast a profit of $1.29 a share on $21.89 billion in revenue.

Terry Daniels, an analyst with Edward Jones, described IBM's results as "generally in line" with expectations, but said hardware sales were a little lighter than his forecasts. Jones currently holds a buy rating on IBM's stock.

Sales from IBM's Global Services division dipped 1%, while sales of its hardware dropped more than 7%. IBM during the last few years has looked to its huge services business to help boost growth as sales of some of its hardware products have slowed.

Global services remained IBM's top revenue generator, accounting for $11.89 billion, or 54%, or total sales. Still, the company reported new services contracts worth $9.6 billion, which was 34% below last year's figure of $14.6 billion and lower than many analysts' estimates of between $12 billion and $13 billion.

Richard Farmer, of Merrill Lynch, said that IBM's new services bookings were their lowest since the third quarter of 2002, and signaled "weakness in long-term signings, which have been experiencing longer sales cycles."

Farmer estimates that IBM will report $11.5 billion in new services signings for its current, third fiscal quarter, but that at least one major deal with the German military could be pushed into the fourth quarter. Farmer hold a buy rating on IBM's shares.

IBM, which faces increased competition in the services market from rivals based in India, has been signing more short-term contracts to meet customer demands. New short-term contract signings in the second quarter totaled $5 billion, with longer-term deals making up the remaining $4.6 billion.

On a conference call to discuss the results, IBM Chief Financial Officer Mark Loughridge said that "while some areas of our business did well, others leave room for improvement."

Loughridge said a highlight of the quarter was IBM's strength in its microelectronics business. While the company didn't break out revenue figures for the chip-making division, Loughridge said microelectronics sales rose 45% from a year ago. The company's chips are to be used in Sony Corp.'s
SNE, +1.01%
upcoming PlayStation 3 video-game console.

Bob Djurdjevic, president of Annex Research, said IBM's results were "generally solid, with occasional sparks of brightness," but still urged some caution for investors. "Even mediocre results can look good if you set the expectations low enough," Djurdjevic said.

Loughridge didn't give a precise forecast for the rest of its fiscal year, but said IBM was confident with analysts' expectations. Wall Street analysts currently expect IBM to earn $1.35 a share on $22.14 billion in revenue for the third quarter.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.